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Is Website Design a Capital Expense or Revenue Expense?

To ascertain whether website design is a capital expense or a revenue expense one must be clear of the terms. Here is a definition I found from accountingcoach.com

A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense. Even significant repairs that do not extend the life of the asset or do not improve the asset (the repairs merely return the asset back to its previous condition) are revenue expenditures.

The IRS and Software Costs

Although the IRS hasn’t issued any real guidance when it comes to website costs specifically, the IRS has provided guidance for software costs. You will treat the costs of creating a website in the same way as computer software if a business looks to a third party to design, develop, create and program the website. If the website is created in-house the costs may either be deducted in the year the costs are paid or accrued depending on accounting method used or amortized and treated like computer software.

New Website and Functionality

The creation of a completely new website, or the creation of significant new functionality to that website will fall under capital expenditure. Usually, the cost incurred for the creation, design, development and programming of a website will be treated as a capital asset. It is also the time when the business may purchase all the necessary hardware to support the website. These purchases will follow existing capitalization policies, will be put on the balance sheet and amortized.

The cost of any additional enhancements should also be treated as new software which requires certain costs to be capitalized if they add functionality or are a product enhancement to externally marketed software. These can also include costs to upgrade the website to add new features such as adding pages to the website, adding sales capability, or adding payment capability.

Improvements and Maintenance Costs

However, improvements to an existing website that update content or improve ease of use, but not functionality, are recurring expenses or expensed when incurred. They are therefore revenue expense and are similar to on-going maintenance and repairs for a physical asset such as a building.

Internal costs for minor upgrades and enhancements may be expensed as maintenance costs if they cannot be reasonably separated. In addition to training and website maintenance costs, you should also expense costs of creating new links, registering with search engines, analyzing usage, website hosting, and performing routine backups.

As with any tax question, you should consult with your tax advisor and provide all pertinent facts and circumstances so that the correct treatment can be determined.